What is interesting about the FRL transaction is that Amazon has been granted a call option to acquire all or part of the promoter’s shareholding in FRL, and this is exercisable between the third and tenth years.
Given how the NDA government is opposed to foreign direct investment (FDI) in multi-brand retail, it is surprising that global online retailer Amazon is picking up a stake in Future Coupons. Future Coupons is a promoter entity for Future Retail Limited (FRL), a pan-India multi-brand retailer. If Amazon converts the 49% stake it is buying in Future Coupons, it would own a 7.3% stake in FRL. As of now, Amazon does not have a controlling stake in FRL, so the Kishore-Biyani promoted retailer cannot be deemed to be a group company of Amazon. Even otherwise, since the stake in Future Coupons would be housed in an investment arm of Amazon, the investment would be in the nature of an foreign portfolio investment( FPI) rather than FDI. The 5% stake that Amazon holds in Shoppers Stop—also a multi-brand retailing chain—is also housed in an investment entity.
What is interesting about the FRL transaction is that Amazon has been granted a call option to acquire all or part of the promoter’s shareholding in FRL, and this is exercisable between the third and tenth years. In other words, Amazon is willing to pay a premium today—around 53%—to be able to acquire the controlling interest in FRL, if and when the law permits. As of now, players like Amazon are technically on the right side of the law in terms of these purchases; that they are able to structure these to their advantage—using FPI entities—is to their credit. But, the fact remains that the investment-arm of Amazon is an associate of Amazon’s and, therefore, by association, Amazon is buying into a multi-brand retailer, albeit indirectly. Also, the law does not allow a vendor selling on a marketplace to procure more than 25% from the marketplace or a group company of the marketplace. In this instance, a vendor could, theoretically, procure more than 25% from FRL—since it is not a group company of Amazon—and supply goods on the Amazon marketplace. Also, it is possible that, by virtue of its stake in Future Coupons, Amazon could influence, in some manner, the merchandise that FRL sells to a third-party vendor, which then sells on the Amazon platform. In December 2018, the government had tightened the FDI conditions in the online space, stating that an e-commerce platform with foreign investment cannot exercise ownership or control over the inventory sold on its platform. But, such transactions, experts point out, do leave room for the marketplace to influence inventory. The government, it would appear, isn’t unhappy with such deals since they bring in big investments—especially in back-end infrastructure—but doesn’t want to formally allow FDI in multi-brand retail given the BJP’s traditional opposition to this. But, given that local retailers will benefit from allowing FDI in, and there is little to show that multi-brand retail FDI will hit local kiranas, the government would do well to re-look its stance.